Over the past years, the empirical issues associated with the aftermarket performance of Initial Public Offerings (IPOs) have been subject to intense professional and academic debate and regulatory scrutiny. IPO shares seem, on average, to perform poorly when measured against various benchmarks over time. Long-run performance also is accompanied by poor financial accounting performance post-IPO relative to pre-IPO performance.
Another facet that has attracted much interest addresses the relation between short- and long-run IPO returns. Considerable short-run IPO overperformance has been observed. When relating the form of earnings management to IPO performance, the market takes a considerable time to respond to the fundamental message conveyed by earnings management behavior at the IPO date. Short-run IPO returns essentially are driven by factors other than fundamental factors. Investor sentiment, driven by the institutional peculiarities of the IPO market, such as underwriter price support, lock-up periods, short-selling constraints or the 25-day “quiet period” after the IPO, are driving forces behind the short-run IPO return dynamics. It takes many months for the market to catch-up to company fundamentals.
Historically, IPO activity has been closely associated with the high-risk, high return profile of companies in NASDAQ. However, market forces and some critical changes in the regulatory framework associated with Sarbanes-Oxley have caused a change in the profile of companies going public. For example, older, more mature companies going public in diverse industry sectors. The decrease in dominance of high-tech IPOs in the universe of IPOs has led to a decrease in correlation with NASDAQ.
Global issuing activity in Initial Public Offerings (IPOs) has picked up and a broad range of industries are forecasted to go public. This is being driven by the favorable performance of recently issued IPOs and fundamental shifts in the profile of US IPO companies following Sarbanes-Oxley, safeguarding higher quality listing standards and decreasing correlation of IPOs with NASDAQ.
Accordingly, an Initial Public Offering (IPO) index product is needed, which meets regulatory requirements and is designed to respond to the fundamental changes affecting the US and international IPO markets.